Congress has passed a major revision of retirement plan rules, including IRA distributions, effective on January 1, 2020. The Secure Act provides additional opportunities for charities to solicit donations of retirement plan money.
Pre-1/1/2020 rules allow an IRA account holder to name a spouse as primary beneficiary and children as the contingent beneficiary. After the account owner’s death, the spouse and then the children could take distributions over their respective life expectancies. This was commonly known as the Stretch IRA. However, Congress has felt for a long time they didn’t want people using inherited IRAs for retirement.
Starting January 1st, the spouse can still roll over the IRA and take distributions over their life expectancy, but the children are now limited to 10 years from the date of the account owner’s death. This means that the children face a significantly higher income tax bill on the IRA distributions unless the account owners review and alter their plans. Depending on the size of the IRA, the children could face several hundred thousand dollars in additional income taxes.
There are several possible solutions. The Qualified Charitable Distribution (QCD), otherwise known as the Charitable IRA rollover, has not changed and you should continue to market it for those who qualify.
In addition, the donor can still name your organization as a beneficiary at their death and pay no income tax on the portion going to your organization.
The testamentary Charitable Remainder Unitrust provides for another possible solution. Testamentary means it is set up at the donor’s death. A charitable remainder unitrust is an irrevocable trust which provides for a payment to one or more income beneficiaries of an amount between 5% and 50% of the value of the assets as determined on a specific date each year. If the value of the trust assets increases, the distribution will increase and if the value decreases the distribution will decrease. On the death of the income beneficiary(ies) the amount left goes to charity.
The payout can be for the life or lives of the income beneficiaries or for a period of years not longer than 20. At the end of the distribution period for the income beneficiaries the balance goes to charity. Each year your organization needs to provide tax information to the beneficiaries because at least part of the income could be taxable to the beneficiaries.
The testamentary charitable remainder trust is clearly more complicated than many planned gifts. However, you can provide a valuable service to donors as well as your organization if you learn how to implement it, if you are willing to wait for the ultimate distribution.
The Secure Act has clearly provided additional opportunities for charities interested in planned gifts of retirement plans. We recommend you include retirement plans in gifts you will accept. Please call if you have questions.